Allegheny Energy officials struggle to restore financial stability
Allegheny Energy officials say they have moved quickly to halt the freefall its stock price has been in this year and give the company a more stable financial future. However, thanks in part to the collapse of giant energy trader Enron, Allegheny Energy has found itself struggling to make ends meet.
Allegheny Energy officials said they are looking to borrow up to $2 billion, cut its work force by 10 percent, trim operating expenses by $45 million, abandon $700 million worth of new power plant construction and put some of its power plants on the block for sale, all in an effort to restore financial vitality.
Among Allegheny Energy’s regulated utilities, doing business as Allegheny Power, is West Penn Power Co., serving 600,000 customers in Pennsylvania, including Fayette, Greene and Washington counties. It employs about 2,000 people in the Pittsburgh region.
The problems Allegheny Energy faces concern its workers, the financial markets and customers who rely on low-priced electricity from the utility.
“The situation we view is short-term liquidity that happened as a result of a downgrade by rating agencies in the past several weeks,’ said Cynthia A. Shoop, vice president of corporate communications at the utility’s headquarters in Hagerstown, Md. “Where we are right now is we received approval from the SEC (Securities and Exchange Commission) to borrow up to $2 billion on a secured basis. Now we are in the process of talking to our banks to secure that lending.
“The reason we had to work through the SEC is because we are a public utility company.”
The company’s troubles began when Moody’s Investors Service changed the senior unsecured debt ratings of Allegheny Energy and its subsidiaries, Allegheny Energy Supply Co. LLC, Monongahela Power Co., The Potomac Edison Co., West Penn Power Co., Allegheny Generating Co. and the Allegheny Energy Supply Statutory Trust 2001.
The events unfolded this way after the Moody’s rating was announced:
– Oct. 1 – Allegheny Energy’s Alan J. Noia, chairman and CEO, responded to Moody’s downgrade of unsecured debt ratings, saying, “We are disappointed with Moody’s decision. However, we understand that the credit rating agencies are dealing with unprecedented challenges facing the energy marketplace.”
– Oct. 8 – Allegheny Energy Inc. announced that it was in technical default under its principal credit agreements and those of its subsidiaries, Allegheny Energy Supply Co. LLC and Allegheny Generating Co., after it declined to post additional collateral in favor of several trading counterparties. “Those counterparties declared Allegheny Energy Supply in default under their respective trading agreements, which triggered cross-default provisions under the credit agreements and other trading agreements. These collateral calls followed the downgrading of the company’s credit rating by Moody’s Investors Service,’ Allegheny Energy said in a statement.
– Oct. 9 – Allegheny Energy Inc. filed with the SEC an application seeking approval for Allegheny Energy Supply Co. LLC, to provide collateral to support additional borrowings. It received approval Oct. 21.
The application seeks authorization for the supply subsidiary to borrow up to $2 billion on a secured basis. As a part of the filing, Allegheny Energy disclosed that it intends to reduce its dividend to 0 percent to 50 percent of the current dividend level through at least the fourth quarter of 2003.
“We don’t anticipate any of this will affect our customers. There are rate caps in effect, and the short-term liquidity problem just affects our supply company, and customers are served by our regulated subsidiary,’ Shoop said.
However, it is “difficult to say how short-term’ the problem will be.
“We are working with our banks, but there is still the issue that the energy markets are depressed. There are still a lot of Enron-related issues. So, obviously, we are doing everything we can to work through this and get the company back on track,” Shoop said.
If Allegheny Energy can secure financing, Shoop added, “we will get the collateral needed to resume trading with all of our counterparties.’
Yet, Allegheny Energy’s troubles may best be reflected in its stock price. It has fallen this year from a high of $43.86 on April 23 to a low of $2.95 per share Oct. 9. At closing on Oct. 31, the share price was $5.70.
Apparently the company’s woes began after it decided to diversify and entered the energy trading business two years ago. The company purchased its energy trading business – Global Energy Market (GEM), now known as Allegheny Energy Global Market – from Merrill Lynch.
“After we purchased it we ran the business for about two years, and the allegations about Enron and some of the wash trades that Enron and Merrill Lynch had made came to our attention.
“Way back in July we announced that in light of the condition in the energy marketplace, that the Enron situation placed a cloud over all energy traders. That, coupled with economic troubles and generally unfavorable operating conditions, have led to difficult operating conditions for utilities in general. Allegheny Energy, being a company that has an energy-trading subsidiary, is affected by this,’ Shoop said.
But Merrill Lynch filed suit against Allegheny Energy, saying the utility omitted to state that its revenues depended on illusory, revenue-creating “wash transactions’ with Enron, and other deceptive energy-trading practices when it purchased the trading company.
Then on Sept. 25, Allegheny Energy sued Merrill Lynch for fraud and breach of contract related to the GEM acquisition. In that lawsuit, Allegheny Energy alleged that it overpaid for GEM because the unit’s financial reports had been inflated by sham trades involving Enron.
The complaint, filed in the New York State Supreme Court, alleges that “Merrill Lynch made false and misleading representations concerning, among other things, GEM’s internal controls and infrastructure… inducing Allegheny to purchase GEM for more than $490 million, thus providing Merrill Lynch with significant profits in connection with the sale of the GEM business.’
Shoop explained Merrill Lynch engaged in a series of “wash” or “round trip” energy trades with Enron, and these trades, which are the focus of both criminal and regulatory investigations, artificially inflated revenues, trading volumes and growth rates.
Allegheny Energy is seeking compensatory damages in excess of $490 million, plus the value of 2 percent of the equity of Allegheny Energy Supply; punitive in an amount not less than $100 million; alternatively, compensatory damages of $375 million; as well as various costs associated with filing the lawsuit.
Shoop said Allegheny Energy also is “continuing to evaluate’ its purchase of three generating plants from Enron.
“At the time we purchased those assets the energy business was in a totally different situation. We felt we paid a fair price for those assets. We would continue to evaluate that but feel we paid a fair price based on what the market prices were at the time,” Shoop said.
She explained the Moody’s downgrade resulted in “collateral calls from some of our trading counterparties, and we made a decision not to pay them.’
These trading counterparties, she explained, are companies that, like Allegheny Energy, trade energy, like other commodities are traded.
“What happens is we have agreements with them, and when we begin trading with them there are rules of how we will work together. In that agreement, it is stated if our rating drops below a certain level, we would be required to post additional collateral. We decided not to post the collateral and stopped trading with those partners to preserve cash.
“We view this as a short-term financial situation that we are involved in. Everything is operating normally, our businesses are fundamentally sound and we have cash to meet all our obligations,’ she said.
By the end of the year, the company will have reduced its work force by 10 percent by offering early retirement, according to Shoop. Allegheny Energy also has reduced its pre-tax operating expenses by $45 million this year and, by canceling a number of power plant projects, will save about $700 million over the next several years, she added.
“We are looking at the possibility of selling some generating assets. We are seeking buyers for those assets. We are not in a fire sale mode, but we are interested in seeing if there are potential buyers for some of those assets.
“We are still rooted in generating and delivery of electricity. The reason we got into the energy-trading business was to diversify our portfolio of businesses. We did the generating and delivery very well but felt this was a good way to diversify our portfolio. We entered a business that might create a little more risk but would be balanced by the steady performance of our regulated business,’ she said.
Allegheny Energy, incorporated in Maryland in 1925, employs more than 5,600 full- and part-time workers systemwide and about 2,390 workers in its Pennsylvania operations.
The company is included on the Fortune 500, Standard & Poor’s 500 index, Barron’s 500 list, and the Forbes “Platinum 400” and “Super 500” lists of America’s best companies.